‘A significant blemish’: Auditor General says Phoenix not improving

Auditor General Michael Ferguson says the calamitous Phoenix system issued $615 million in incorrect payments last year and is as dysfunctional as it was a year ago.

Ferguson, who audits the government’s financial statements, gave the 2018 Public Accounts a clean audit. But in a separate report on his audit of the books, he calls the Phoenix pay crisis a “significant blemish” on the federal government’s financial record for the year.

Ferguson turned the spotlight on three key issues, or “observations,” in a separate 35-page report, which he calls a “commentary” rather than an audit report.

He praised the change in the way the government is calculating its pension liability, and National Defence for taking steps to improve how it manages its inventory. But there was nothing to crow about with Phoenix.

“There’s one significant blemish on this record: The government still has not shown signs that it has reduced the impact of pay errors coming from its transformation of pay administration, which includes the Phoenix pay system,” Ferguson wrote in his report.

He said the extent of errors produced by the new pay system showed “no improvement” from last year. In fact, Ferguson found the number of people with errors and cases in the backlog continued to mushroom over the past fiscal year.

Ferguson audited a sample of 16,000 pay transactions from 47 of the 101 departments that use Phoenix. He found $615 million in pay errors in the last year — $369 million in underpayments and $246 million in overpayment to employees.

He found 62 per cent of employees sampled were paid incorrectly at least once during the year — the same percentage as last year.

Furthermore, he found 58 per cent were waiting for pay fixes, also the same percentage as last year. Public servants with errors on their files had between one and 19 mistakes with their pay.

His audit found that pay errors continued to increase, and more than half of employees sampled had pay mistakes for most of the pay periods last year. About 58 per cent had errors in the final paycheque, an increase from the 51 per cent in the same period the year before. Public servants are paid every two weeks.

Ferguson’s audit tracked the number of people and outstanding pay files for the 46 departments using the pay centre in Miramichi, N.B., to manage their pay. Those numbers have continued to mushroom, despite Public Service and Procurement Canada (PSPC)’s all-out efforts to fix Phoenix and eliminate the backlog.

By the end of March 2017, some 144,600 employees had 463,600 outstanding pay transactions. A year later, in March 2018, the number had grown to 182,500 employees with about 579,700 outstanding pay requests. By June, some 187,000 employees had pay problems, with a backlog of 576,300.

Despite the errors, Ferguson said the amounts don’t have a material impact on the government’s books, because the over- and underpayments largely offset each other.

He noted the government also adjusted its accounting to improve the accuracy of its pay expenses, but said that doesn’t correct the “underlying problem, nor … the pay errors that continue to affect thousands of employees.”

The auditor general has given the government books a clean or “unqualified audit opinion” for 20 years in a row.

Ferguson’s Phoenix findings come as PSPC, the paymaster, struggles to stabilize Phoenix. It was given $431 million in the 2018 budget to fix it, while Treasury Board was given $16 million to find an eventual replacement. The department has pinned high hopes on the introduction of pay pods to turn things around by speeding up processing and reducing the backlog.

Previous auditors general typically raised concerns they wanted MPs to pay attention to in their audit observations, which are published in the Public Accounts.

Ferguson is no different. This year, he included his observations in his third “commentary report” on the results of his financial audits, so parliamentarians have more information and insight when they hold the government to account on federal spending.

The last time Ferguson veered into commentary was in a preface to his scathing report on the Phoenix fiasco, calling it an “incomprehensible failure.” That report was an unprecedented indictment of the culture of the public service, and drew the ire Canada’s top bureaucrat, Michael Wernick, who called the report an “opinion piece.”

Ferguson calls for: more training at every step of the pay process, better internal controls, and a reduction of the 80,000 federal pay rules bogging down the Phoenix system.

He stressed that paying employees correctly is a government responsibility, which is shared by PSPC and all departments, and to “provide timely and accurate information about changes to employees’ pay.”

He said the volume of errors is directly related to the complexity of pay. An employee’s pay has too many “elements,” each with its own rules and frequency of payments. A mistake in one element has a domino effect and affects another.

On top of basic salary — and any raises or promotions — public servants are entitled to various allowances, such as for: education; living in remote areas; acting pay; bilingual bonus; and shift premiums. The pay for part-time or hourly employees is even more complex.

Ferguson found the top Phoenix errors were in: base salary at 24 per cent; acting pay at 15 per cent; retroactive pay at 14 per cent; vacation or statutory holiday pay at 12 per cent; and other allowances at 10 per cent.

He said the new collective agreements negotiated in the last round of bargaining, which were retroactive to 2014, dumped hundreds of thousands of retroactive transactions into the system. Those who already had errors often ended up with retroactive pay calculated on wrong information.

Unions and Treasury Board are in a new round of collective bargaining now, and streamlining pay rules is an issue on the table.

“In our view, reducing the complexity of employees’ pay by combining various elements of compensation could reduce errors and the significant effort needed to accurately pay employees. Streamlining pay rules could allow the Phoenix pay system to process more transactions,” Ferguson wrote.

With so many pay rules, he said compensation advisers have to manually calculate and process payments. Ferguson said the government will have to continue employing the 1,500 compensation advisers hired to deal with the crisis until the backlog is eliminated and manual processes are reduced.

The pay centre originally processed pay transactions by type — such as grouping together overtime or acting pay — but moved to pay pods this year. With pods, teams of compensation advisers work on specific departments and handle all the pay transactions in an employee’s file at once.

Ferguson said the move to pods was too recent to assess whether they are working.

In his report, Ferguson also warned that the government has 30 major technology projects planned or underway that could flop like Phoenix if the risks aren’t properly managed.

“If federal organizations do a poor job of managing the risks and challenges inherent in significant and complex projects with IT components, the result could be more failures like Phoenix. To properly manage these risks and challenges, there are some commonly used practices.”